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S&P revises credit outlook on Starhill Global Reit to 'negative'; DBS issues 'buy'

S&P Global Ratings has revised its rating outlook on Starhill Global Reit (SGReit) to "negative" from "stable", on the expectation that the trust's financial leverage will be stretched over the next 18 to 24 months.

Meanwhile, DBS Group Research has issued a "buy" call on the trust, citing that its Malaysian assets are getting a "new lease of life". DBS has a 12-month price target of S$0.75 on SGReit, which represents a 6 per cent upside from the counter's March 19 close of S$0.705. 

As at 10.09am on Tuesday, units in SGReit were trading at S$0.70 per unit, down 0.7 per cent or 0.5 Singapore cent. 

"We expect SGReit's leverage ratio to deteriorate to below our downgrade trigger because of an asset-enhancement initiative (AEI) concerning its Starhill Gallery in Malaysia," S&P Global said in a press statement on Tuesday. 

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"We anticipate that SGReit's ratio of funds from operations to debt will fall to the low end of the 8 per cent range over the next few years. This leverage measure is weaker than our previous estimate of 9.2 per cent to 9.6 per cent for fiscal 2020."

S&P Global added that the rental rebates given to the Starhill Gallery tenant during the two-year AEI period will be a drag on the trust's funds from operations. 

SGReit previously announced that these enhancement works would cost RM175 million (S$58 million), and could start by July 1. Meanwhile, a rental rebate of RM26 million per year will be given to the master tenant during the asset enhancement period.

"Material delays, cost overruns, or under-performance at SGReit's other assets that result in a drop in net property income could also lead credit metrics to remain sub-par," S&P Global added. 

Nonetheless, the credits rating agency is affirming SGReit's issuer credit rating, and the rating on its guaranteed senior unsecured notes at 'BBB+'. This comes as S&P Global anticipates that secured occupancy, and higher rents on lease renewal following the AEI's completion in 2021 could lead to a recovery in leverage ratios by 2023. 

"Over the longer term, the AEI should enhance SGReit's asset quality and contribute more resilient recurring income," S&P Global said. 

It also expects higher rents from SGReit's Singapore retail assets to temper the effects of rental rebates over the AEI period. 

Separately, DBS noted that SGReit has entered into new conditional master leases for its Malaysian properties, including Starhill Gallery and Lot 10 Mall located in Bukit Bintang, Kuala Lumpur. The leases for Starhill Gallery and Lot 10 will be extended by 19.5 years and nine years respectively. 

"We believe this extension to provide the well-needed long-term income visibility and certainty for its Malaysian assets. These properties had generally lagged in performance given the increasing competition in the Bukit Bintang area over time, with the main competitor Pavilion Mall being the main draw for shoppers," DBS said in a research note on Wednesday. 

DBS added that the master leases will shield the properties from any downside reversion in rents.

While gearing is set to increase slightly to 36 per cent as the Reit undertakes the enhancement works, DBS is of the view that SGReit's distribution per unit will not be impacted.